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ISM Article

Plan Your Way To Success

4 Oct, 2010 By: Tom Callinan, Strategy Development imageSource

Plan Your Way To Success

The team that makes up our management consulting company (Strategy Development) is frequently contacted by a Dealer / Reseller for help in addressing a perceived issue, i.e. equipment revenue growth; to improve an MPS program; increase service margins; achieve more net income. Almost universally, the dealer has attempted to fix his problems with some “cure all” such as a new compensation plan, reducing head count, increasing head count, or putting somebody else in charge of a functional area. 

The first real lesson of sound business planning is to learn that “all is not what it seems.” Do you know how many dealers that we’ve worked with who thought the path to equipment growth was to simply add more sales people?

Turnover & Productivity
If you have sales rep turnover lower than 25% and rep productivity above $600,000, that is probably a sound approach. Unfortunately, what we find most of the time is that rep turnover exceeds 100% with rep productivity in the $250,000 range, and a sales manager who has never been trained to manage.

When you have 100% turnover and you add more headcount to the equation, the outcome is basically assured. Your turnover starts to rapidly move toward the 150% range and your productivity decreases. The end result will be more sales reps, additional expenses, and lower revenue.

You had wanted to increase revenue and thought your issue was not enough sales headcount, but your real issue was turnover and productivity. At least at a high level your issue is turnover and productivity but since that problem identification is still at a level too high to address, it needs a lot more analysis to identify the drivers.

No Quick Fix
Another common finding is that the dealer “fixed” one area but it did not have a positive effect on net income. For instance, maybe they “increased” service returns by six percentage points and their operating income barely moved. We find the fix was moving employees out of service and moving revenue into service. Although both of these could be legitimate changes, they fall into the category of neutral changes that require recasting of past periods. The ultimate measurement of a fix is when it flows through to operating income.

To clarify this service example, if you had three employees coded to service that should have been in administrative expenses, you should move them there, but that is not an increase in service margins as your service margins have been reported artificially low for as long as those employees were miscoded. You need to go back and move that expense from service to admin for as long as they were miscoded, or two years; whichever is shorter. The same thing with revenue; if you allowed sales reps to discount service without taking it out of equipment gross profit, you need to show prior periods as if you had moved the revenue—these examples are not an increase in service profit they are simply misreporting.

The key here is to have figures that are comparable from period to period. If you move around revenue, gross profit or expenses and don’t change prior periods, it is virtually impossible to get visibility into what needs to be fixed. Visibility is critical to identifying the actual issue.

Identify Goals
What these two examples demonstrate is that you need to clearly identify your goals, what is preventing you from achieving those goals, and the information you need to develop plans to change and then accurately track the effect of those changes. You also need solid statistics and financial information that provides comparability from period to period.

If your goal is to grow equipment revenue you need to analyze what is preventing you from growing equipment revenue today. Resist the urge to identify a single “major causal” as it probably does not exist. Look at the macro environment first: What is happening with U.S. equipment placements and average unit selling price? If unit placements are decreasing by 3% year to year, you need to grow market share by 3% just to maintain your current revenue.

After you understand the macro environment you should look at rep productivity, or the average revenue per equipment sales rep. If your rep productivity is less than $400,000, I would almost guarantee that you have high turnover. Measure your turnover and make sure you measure it over a rolling 12 month period: starting quantity of reps, terminations (fired or resigned), additions, ending quantity of reps. If you have eight reps and at the end of the year you now have four of the original reps and four new reps, your turnover is not necessarily 50%. There is a good possibility that those four new reps at year-end are the second set of four you hired that year, for a total of eight or 100% turnover. 

Why should you spend the time required to put together and execute on a sound business plan? The simple answer is the old saying: “If you don’t know where you’re going, you’ll probably end up somewhere else.”

Tom Callinan is the founding principal of Strategy Development, a management consulting firm for the MPS & outsourcing space. Atwww.strategydevelopment.org.

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